Sullivan Company

Study Guide Chapter 7 1. Clear View Windows Inc, has the following asset account balances: Buildings and equipment $2,873,000 Accumulated depreciation 727,000 Patents 125,000 Goodwill 298,000 Accounts receivable 165,000 Land 1,372,000 What is the total amount that should be reported on Reed, Inc. ’sbalance sheet under Property, plant, &equipment, net? A. $2,146,000 B. $3,518,000 C. $4,972,000 D. 3,941,000 Answer: B Rationale: $2,873,000-$727,000+$1,372,000=$3,518,000 2. Sullivan Co. sold equipment that was 4years old. Sullivan Co. had originally estimated its useful life to be 5years. As aresult of recording the sale transaction, shareholders ’equity increased. Which one of the following reasons is aprobable cause of the increase? A. Sullivan Co. sold the equipment for more than the book value of the equipment. B. The amount that Sullivan Co. received for the sale was more than the equipment ’scost. C. The market value of the equipment sold was greater than the book value. D. The book value of the equipment sold was greater than the selling price. Answer: A 3. Depreciation expense is an example of: A. The conservative principle B. The matching principle C. The revenue recognition principle D. None of the above Answer: B 4. The following costs related to the purchase of production equipment were incurred by Barco, Inc. Which item iscapitalized? A. Interest costs incurred to finance the equipment over its five-year useful life B. Depreciation costs during the first year of life C. Transportation charges to deliver the equipment to Barco, Inc. D. Maintenance expenditures during the first year of equipment use Answer: C 5. On January 1, Larry ’sLandscaping Co. purchased a tractor for $42,000 cash. Larry ’s paid freight charges of $900 to the trucking company to deliver the tractor to its home office. The estimated salvage value and useful life of the tractor are $2,000 and 5years, respectively. Under the straight-line method, what is the book value of the equipment as of December 31, Year 4? A. $9,280 B. $8,180 C. $42,900 D. $10,180 Answer: D Rationale: $42900 –[(($42,000+ $900 –$2,000) /5) ×4] =$10,180 6. Green Valley Feed Store purchased aused forklift from acompany going out of business for $38,000. An appraisal indicated the fair value of the forklift to be $43,500. Green Valley estimated the forklift would provide future benefits for 5years and would bring a$1,300 residual value at the end of the 5-year period. How much isthe depreciation expense for the second year of life ifGreen Valley uses the double- declining-balance method? (Round $answers to the nearest whole dollar.) A. $7,600 B. $8,808 C. $9,120 D. $10,270 Answer: C Rationale: Rate =2/5=40% Book Value Rate Expense Year 1 $38,000 40% $15,200 Year 2 22,800 40% $9,120 7. The Cheat River Company is a coal company based in West Virginia. The company recently purchased anew coal truck for $54,000. The truck had an expected useful life of 200,000 miles and an expected salvage value of $4,000. What is the depreciation expense using the units-of-production method assuming the truck travelled 40,000 miles on company business during the year? A. $12,200 B. $ 8,620 C. $10,000 D. $ 8,400 Answer: C Rationale :(40,000 /200,000) x($54,000 -$4,000) =$10,000 8. Emmie &Lisa obtained apatent for anew optical scanning device. The fees incurred to file for the patent and to defend the patent in court against several companies which challenged the patent amounted to $86,400. Emmie &Lisa concluded that the expected economic life of the patent was 12 years, although its remaining legal life was 18 years. What amortization expense should be recorded in year two? A. $ -0- B. $ 7,200 C. $ 4,000 D. $12,000 Answer: B Rationale: $86,400 /12 =$7,200 9. Anchorage Company began exploration of oil in Alaska by paying $880,000 for the drilling rights on alarge tract of land. The company drilled 11 oil wells on the land. Four of the wells were unsuccessful “dry ”holes, but the other seven wells struck oil. Assume the company paid $65,000 each for the wells. In addition, the company paid $80,000 in other infrastructure costs associated with the drilling project. Calculate the capitalized cost of Anchorage Company ’soil reserves using the full cost method. A. $1,675,000 B. $1,020,000 C. $1,140,000 D. $1,335,000 Answer: A Rationale: $880,000 +$80,000 +($65,000 x11) =$1,675,000 Chapter 9 1. NE Airlines issued 25-year bonds with amaturity value of $2 million. Which statement is true if the bonds were issued at apremium? A. The yield rate of interest exceeded the coupon rate. B. The cash rate of interest exceeded the coupon rate. C. The yield rate of interest was greater than the maturity value of the bonds. D. The yield rate of interest was less than the coupon rate. Answer: D 2. Myrtle Limited issued $1,600,000 of 6%, 10-year bonds at adiscount on July 1. The bonds pay I nterest semiannually. Approximately how much cash did Myrtle receive upon issuance assuming amarket yield of 7%? A. $1,600,000 B. $2,120,000 C. $1,486,000 D. $1,488,000 Answer: C Excel formula isas follows: =PV(0.035,20,-48000,-1600000) =$1,486,301 3. Follett Inc. issued $56,000 of 7% bonds on January 1at adiscount of $1,650. Interest expense reported during the year totaled $3,920, while amortization amounted to $165. How much isthe book value of the bonds on December 31? A. $52,095 B. $57,485 C. $54,185 D. $54,515 Answer: D Rationale: $56,000 –$1,650+ $165 =$54,515 4. Pelham Inc. issued $180,000 of 6%, 5-year bonds at par on July 1. The bonds pay interest semiannually. How much cash did Pelham Inc. receive upon issuance? A. $195,354 B. $174,600 C. $180,000 D. More information is needed to calculate Answer: C 5. Russell Co. Co. issued $40,000 of 7-year, zero-coupon notes on January 1when the market yield was 4%. The bond agreement stated that compounding was semiannual. The issue price of the notes was $30,315. How much interest will Russell Co. Co. report on its income statement during the first year? A. $1,213 B. $1,224 C. $1,200 D. $1,237 Answer: B Rationale: First 6months: $30,315 x4% /2=$606 Second 6months: [$30,315 +$606] x4% /2=$618 Total interest: $606 +$618 =$1,224 6. Painting Pro reported three debt obligations:  $70,000, 4.0% notes payable  $110,000 7% bonds issued at par  $920,000, 8.5% mortgage notes Ifthe market rate of interest averaged 5.8% during the year, what is Painting Pro ’sweighted- average cost of debt? A. 8.1% B. 6.5% C. 19.5% D. 9.1% Answer: A Rationale: $88,700/1,100,000= 8.06% Amount of Borrowing Interest Rate Interest Cost $ 70,000 4.00% $ 2,800 110,000 7.00% 7,700 920,000 8.50% 78,200 $1,100,000 $88,700 7. Which of the following isnot amethod used to calculate the implicit rate of interest on alease? A. The firm ’sweighted average cos of debt B. The firm ’sincremental cost of borrowing C. The firm ’sinferred rate based upon its credit rating D. All of the above are acceptable under GAAP. 8. Which statement istrue as itrelates to callable bonds? A. The bond investor has the right to exchange the bonds for common stock. B. The bonds are considered ‘junior ’to the claims of secured creditors. C. The bond investor can request that the bonds be repaid prior to the maturity date. D. The issuing company can pay off the bonds before maturity. Answer: D Chapter 9 1. During the year, Erickson ’sFurniture, Inc. issued 3,000 shares of its $0.50 stated value common stock for $25 per share, and declared and paid cash dividends totaling $0.25 per share. By what amount does contributed capital increase as aresult of these events? A. $75,000 B. $ 1,500 C. $74,250 D. $44,250 Answer: A Rationale: $25 ×3,000 =$75,000 2. Finn, Inc. began the year with abalance in retained earnings of $31,600 and 32,000 shares of $1 par common stock outstanding. During the year, the company reported sales of $102,000, expenses of $78,700, and declared and paid a$0.25 per share cash dividend. How much isthe balance in the Retained Earnings account at the end of the year? A. $46,900 B. $23,600 C. $54,900 D. $40,500 Answer: B Rationale: Net income =$102,000 –$78,700 =$23,300 Dividend =$0.25 ×32,000 =$8,000 Retained earnings =$31,600 +$23,300 –$8,000 =$46,900 3. Brown Inc. reported the following information at December 31: Preferred Stock, $2.00 par, 10,000 shares authorized $ 5,600 Additional paid-in capital –preferred stock 16,800 Common stock, $1.00 par, 12,000 shares authorized 8,320 Additional paid-in capital –common stock 4,160 Retained earnings 9,185 Treasury stock, at cost of $4.50 per share (1,350) Total $42,715 How many shares of common stock are outstanding? A. 8,320 B. 8,020 C. 8,620 D. 11,120 Answer: B Rationale: Common shares issued =$8,320 /$1.00 =8,320shares Treasury shares =$1,350 /$4.50 =300 Outstanding =8,320 –300 =8,020 4. Fans Inc. reported the following information at December 31: Preferred Stock, $1.50 par, 10,000 shares authorized $ 3,600 Additional paid-in capital –preferred stock 4,800 Common stock, $1.00 par, 9,000 shares authorized 1,650 Additional paid-in capital –common stock 4,125 Retained earnings 7,200 Treasury stock, at cost of $3 per share (1,200) Total $20,175 Fans Inc. ’scommon stock was selling for $11 per share at year-end. Ifthe company declares and pays a10% common stock dividend, what will be the amount of total shareholders ’equity at year-end? A. $20,175 B. $21,825 C. $20,625 D. $24,225 Answer: A Rationale: Common Stock + Paid-in capital would increase and retained earnings would decrease by the same amount. Since both are reported as part of shareholder ’sequity at year end, they offset. 5. Which isnot acharacteristic of preferred stock? A. It can be cumulative, which means holders are entitled to accumulated and unpaid dividends until such time as the company pays dividends. B. In adissolution of the company, the holder will be paid after all other claims to assets have been satisfied. C. The holder may have an option to convert the stock to common stock. D. The holder may participate in special dividend distributions, under certain conditions. Answer: B 6. Hydro was granted permission to issue 8,000 shares of $0.25 par value common stock. Net income for the year for Hydro was $88,700. In addition, the following transactions took place during the year: January 2: Investors paid Hydro $9 each for 3,120 shares of common stock April 15: Hydro purchases 800 shares of its own common stock for $7.50 per share November 30: Hydro declared a2-for-1 forward stock split. Market price was $13 per share . As of December 31, how many shares are issued, and how many shares are outstanding? A. Issued, 6,240; Outstanding, 3,480 B. Issued, 3480; Outstanding, 3,480 C. Issued, 4,640; Outstanding, 3,480 D. Issued, 6,240; Outstanding, 4,640 Answer: A Rationale: Issued =3120 ×2=6,240 Outstanding: 3,120 –800 =2,320 x2=4,640 7. Hydro was granted permission to issue 8,000 shares of $0.25 par value common stock. Net income for the year for Hydro was $88,700. In addition, the following transactions took place during the year: January 2: Investors paid Hydro $9 each for 3,120 shares of common stock April 15: Hydro purchases 800 shares of its own common stock for $7.50 per share November 30: Hydro declared a2-for-1 forward stock split. Market price was $13 per share on the declaration date. How much did Hydro record as Paid-in-Capital? A. 33,100 B. 27,300 C. 100,300 D. 32,300 Answer: B Rationale: Issued =(3120 ×8,75) +=27,300 8. Baker Books began the year with $125,200 in retained earnings, and 61,800 shares of $0.20 par value common stock originally issued at $6 per share. The board of directors declared $12,500 of cash dividends on June 30. On July 1, Baker Books declared aforward 2-for-1 stock split. The market price of the Baker ’sstock was $6.50 just before the split. Which of the following is one effect on the day the stock split occurs? A. Retained earnings declines by $433,000. B. Common stock increases by $30,900. C. Total shareholders ’equity increases by $61,800. D. The market price of the stock declines to $3.25. Answer: D Rationale: $6.50 /2=$3.25